If 2023 M&A market has taught us anything, it is that ESG is a key driver of long-term value creation and has a lasting impact on the valuation given to companies.
The importance attached to ESG rating can be explained by the fact that robust ESG policies pay off; companies that pay attention to their ESG performance deliver better financial performance, also create value for their business, have easier access to financial resources and are leaders in the labor market.
Social themes such as good corporate governance, carbon reduction, circular entrepreneurship, diversity & inclusion and working conditions thus resonate in the corporate sector (large business and SMEs).
This development is fueled by increasingly critical consumer behavior and investment decisions, as well as more stringent laws and regulations. The subject is gaining increasing influence on strategic decision-making within boardrooms.
To measure is to know
Not only does ESG play a role in the valuation and potential value creation of a company, but increasingly ESG-related questions and topics are proving to be part of the due diligence as part of a business acquisition.
The outcomes of this component are also increasingly influencing the investment decision, final purchase price and risk allocation. A lack of ESG policy or of concrete and measurable objectives leads to a lower valuation of the company and thus lower purchase price.
But also announced laws and regulations in the (near) future require having an understanding of and continuous attention to ESG factors.
CSRD and CSDDD
Two important guidelines announced in Europe are the CSRD and the CSDD.
Under the CSRD, many businesses will have to start reporting on their ESG policies and their impact on the environment, climate and the broadly speaking; the world around us.
The CSRD concretizes the sustainability information that businesses must disclose and publish in a similar way that they must disclose and publish their financials. The company's management report must also include a description of its business model, strategy including plans by which the company contributes to the transition to a sustainable economy and the mitigation of global warming. The EU is pursuing standardization in this regard.
The Corporate Sustainability Due Diligence Directive (CSDDD) sees a requirement for appropriate due diligence (due diligence) on sustainability. Sustainability in the broad sense of the word.
Companies under the scope of the CSDDD are required to have policies in place to identify, prevent and/or mitigate the negative human rights and environmental impacts of their operations.
Clarity and frameworks
A major benefit of the CSRD is that it clarifies how the various ESG factors can/should be reported and what standards should be used for this purpose.
This leads to clearer, more comparable and assessable information about different companies. Parties can no longer hide behind hollow claims and nice messages but will have to report on the same components and in a similar way. This will make the score and ESG maturity of different companies transparent and allow decisions to be made based on those insights.
ESG: wait or move on
Parties that follow through now or that catch up quickly with the newly available information will prove to be more valuable in the near future but also in the long term and will occupy a resistant and sustainable position in the market in which they operate.
Parties with robust sustainability policies will prove to be trusted relationships and the desired employer for new talent. As the UN said in 2004, Who cares, wins.
